Still with China and there’s been a larger than expected rise in the size of China’s foreign exchange holdings in the six months to June.
According to official figures released yesterday the reserves topped $US2 trillion for the first time.
This was an increase of $US179 billion in the June quarter compared with just $US7.7 billion in the March quarter.
No explanation was given for the size of the increase in the June quarter.
The total is now $US2.132 trillion, according to the central bank, the People’s Bank of China.
Around $US763 billion of that is held in US Treasury securities.
The figure was given ahead of the release of final figures on the June trade position and the figures for the first half of this year. The trade surplus has shrunk, which would have cut the amount flowing to the official reserves.
China’s foreign direct investment (FDI) dropped by 18% to $43 billion in the first half of the year (It was off 20% in the five months to May), according to figures released yesterday.
The $US179 billion added to the country’s reserves was down $US95 billion from the same period of 2008.
The central bank said $US42.1 billion was added in June, $US30.2 billion more than the same month in 2008. Over $US80 billion flowed in to the country in May.
Exports fell 21.8% in the January-June period in the sharpest fall in a decade and imports were down sharply as well.
But the trade surplus fell 1.3% to $US96.94 billion in the first half, which is also too low to explain the $US185 billion rise, even after adding in the direct investment figure.
The value of the reserves would have been depressed by the weaker US dollar in the half year because of the holdings in Treasury bills (around 35%-38%).
The weakness in the greenback would have seen assets held in euros and yen rise in value, but again that probably wasn’t enough to fully explain the larger than expected increase.
Therefore the amount added to reserves from unofficial inflows would have been much more than it first seems.
China’s reserves have more than doubled in two and a half years as the trade surplus soared from 2006 onwards.
The reserves are double those of Japan, the country with the second-largest holdings with around $US1 trillion.
Bloomberg said that the rise in China’s reserves was probably driven by higher valuations for non-dollar assets because of the US currency’s weakness, and inflows of speculative capital, or so- called “hot money”.
It was behind the surge in 2007 as billions of dollars flowed in and out of China through so-called black channels in and around Hong Kong.
The small rise in the first quarter was linked to an outflow of this hot money from investors worried about China’s economy after the sharp slump in global trade.
As well many investors found they needed the surplus funds they had placed in China and Hong Kong back home elsewhere in Asia, the US and Europe because the slump and credit crunch had hammered cash flows and profits, especially in banks and investment houses.
The country’s banks are lending heavily at the moment: money supply is soaring, up close to 30% so far this year, as billions of dollars of loans are made a day.
The Chinese central bank this week started selling one year so-called sterilisiation notes to mop up some of the liquidity. That’s a major change in stance because up till now it had been injecting money into the system.
The stockmarket has surged on speculative investment from abroad and internally. It is up close to 80%, depending on which index you use and hit a 13 month high this week.
